Long-term Treasury yields rose this week despite the Fed’s cuts in interest rates. The move has shocked the bond market. The 10-year financial yield, below 4%, jumped to 4.145%.
The 30-year yield, which is important for mortgages, rose to 4.76% after hitting a weekly low of 4.604%. The Fed reduced its policy rate to 4.00%-4.25% on Wednesday, a one-year cut on Wednesday. It helped to boost stock prices, but the bond market did not respond in the same way.
According to Bloomberg, long-term bond investors weren’t able to get what they wanted – they’re sure inflation will remain under control.
Peter Bookbar, chief investment officer at BFG Wealth Partners, said traders use Fed moves to make profits, calling it an opportunity to “sell news.”
Peter said those who hold long bonds “don’t want the Fed to cut interest rates.” When traders throw away those bonds, prices drop and rise. That’s exactly what happened.
Powell’s “risk management” faces doubts from bond traders
Peter noted that while inflation is above 3% and while the economy is still solid, easing monetary policy will send a dangerous signal. He said the Fed might “prominently make inflation stand out.” New Fed forecasts released Wednesday show that staff expect inflation to rise slightly next year. That’s not something bondholders wanted to hear.
Investors have hoped the Fed will focus on employment from inflation, especially after employment numbers weaker earlier this month.
Jerome Powell described the cut as a “risk management” move, referring to slowing the labor market. However, Peter said, “If bond markets continue to have higher (longer yields), they will send a message saying, “I don’t think we should actively cut interest rates by sticking to 3% inflation.”
He also explained that this week’s yield jump came after bond prices had already risen for several months. Yet, yields have fallen, but now they are backing down, as they did after the Fed’s cut in September 2024. Peter is noteworthy that despite the Fed’s cuts multiple times since then, the 10-year yield hasn’t moved much since the beginning of the year.
High yields are more than just bad news for bondholders. They affect everything from home loans to car financing. Mortgage rates rose after the Fed was cut, wiping out profits from the three-year lows at the beginning of the week. It hits the home.
On Thursday, Homebuilder Lennar reported disappointing revenue for the third quarter, warning that delivery will be weaker in the next quarter. CO-CEO Stuart Miller denounced “continuous pressure” in the housing market and denounced “up” interest rates in the third quarter.
The bond market is waiting for terrible news before buying again
FWDBonds chief economist Chris Rupkey said the bond market will not move with one rate cut. He said, “It’s not a journey, it’s a destination.” What matters is how far the Fed will go.
Chris said the traders were trying to understand “What is the end game?” And they will only respond after they are convinced that the Fed is serious about cutting fees significantly.
Peter added that he also states that the US is following what is happening overseas. He said that the actions of foreign central banks are important here as international fees are also rising. However, Chris was warned against anyone cheering for a lower yield.
He said that a decline in yield usually means a recession is coming. This week’s yield jump came shortly after unemployment claims fell.
Chris said, “Don’t be too pleased with lowering bond yields. It may mean that it’s impossible to find a job.” He also said, “Unfortunately, the bond market is just accepting bad news. Not just bad news… horrifying news.”
